Andrew Heaney, a pitcher for the Angels, recently became the latest athlete to sell a chunk of his future earnings to FanTex. FanTex is paying Heaney $3.34 million in exchange for 10% of Heaney’s future baseball-related income.
Why would Heaney do this? He’s a Major League Baseball player, so surely he’s already unimaginable wealthy, right?
Heaney actually is better off than most players with his amount of Major League service time. When he was drafted (in the first round of the draft), he signed for a $2.6 million signing bonus. The majority of draftees sign for a bonus of $5000 or less.
Minor leaguers make almost nothing – less than minimum wage, according to a pending class action lawsuit. So it’s unlikely that he’s been able to save any of the money he made in salary while in the minors.
$2.6 million is a lot of money, though, so he should be fine, right? Taxes are going to take a huge chunk of that, and even the thriftiest person would have spent some of the money – a new car, a modest house in the suburbs (LA isn't cheap), maybe helping mom and dad pay off their mortgage, and of course, food. I’ll speculate that maybe he has $1.2 million left. Heaney is 24 years old, so he may need to stretch that money 50-60 years. With some fortunate investing, he might be able to do it – or he might end up selling athletic supporters at the sporting goods store when he’s in his sixties. 60 years is a long time to stretch a million dollars.
[Editor's Note: If we apply the theoretical "rule" of 4% we could estimate that 1.2 million would allow him to spend $48,000 a year indefinitely.]
So Heaney decide to hedge in order to avoid his worst case scenario. Was he smart to do it? Let’s look at some factors.
It’s true that baseball contracts are guaranteed – but until a player reaches free agency a team has “control” of a player, which effectively means they can sign him to one year deals at below market rate deals. The deals grow closer to market rate as the player gets closer to free agency. Heaney will be eligible for free agency after the 2021 season, at which point he would be free to sign a multi-year deal with any team. (Note: This is a fairly simplified explanation of how the system works. I’m leaving out details for the sake of clarity.)
There’s one big catch, though. Heaney must be perceived to be a valuable commodity in order to secure a big deal. Heaney is seen as having good potential, but he’s certainly not a lock to become a superstar. It wouldn’t be a shock if he flamed out early either due to injury or poor performance.
A few years ago, Daniel Bard was a hot prospect for the Boston Red Sox. He was their first round draft pick in 2006 and their minor league pitcher of the year in 2008. He pitched as a reliever in the majors for three years (2009-2011) and did well – among other things, striking out ten batters per nine innings pitched. However at the end of 2011, something went wrong. As Wikipedia states, "He finished September 0–4 with a 10.64 ERA... Based on win probability added (WPA), the player most responsible for Boston's collapse was Bard." In 2012, the Red Sox decided to put him in the starting rotation. He didn't get any better than September. His strikeout rate dropped while his ERA swelled. He gave up more homers, he walked people, he hit batters. He was sent to the minors and continued to suck. In 2013, the Red Sox waived their rights to Daniel Bard. Daniel Bard earned roughly three million dollars in the major league.
If he had been able to sell 10% of his future earnings (~ $300,000) to FanTex for $3.34 million, it would have been a great deal for him.
Daniel Bard just suddenly lost his ability to get batters out. This is not particularly uncommon. Rick Ankiel was having a great career when he suddenly developed control problems and quit pitching, later resurfacing as a pretty mediocre outfielder (career earnings: ~ $12 million, almost all of which he earned because he was able to transition to being a hitter – something that most pitchers can’t do).
There’s also the risk of injury. A third of major league pitchers have Tommy John surgery, which replaces the ulnar collateral ligament in the elbow. It’s a tremendously successful surgery that has extended the careers of a great many pitchers. Tremendously successful - some studies claims a 90% success rate – still means that sometimes it doesn’t work. 10% of the time, the pitcher never bounces back to pre-surgery form.
The downside of Heaney’s deal with FanTex is that he might earn huge amounts of money and be selling a 10% share too cheaply. If Heaney turns into the next coming of Clayton Kershaw, there may be a $300 million deal in his future. In that case, he would have sold $30+ million in future earnings for just $3.34 million in 2015 dollars. However, given Heaney’s age (which affects career length), status in the sport, and the fact that most pitchers are in decline by their mid 30s, I’d peg an estimate of Heaney’s career earning at somewhere between $50 and $150 million. In my best case earnings scenario, he’d be selling $15 million in future earnings for $3.34 million.
The $3.34 million from FanTex, after taxes, would probably grow his nest egg to about $3 million. That would allow Heaney to invest pretty conservatively and probably still be able to avoid ever having to work a “real job”. While it’s true that he might end up losing money if he ends up earning $150 million, the fact that he managed to earn $150 million will help sooth the pin.
Essentially, Heaney’s saying that the difference between his current earnings of about $3 million (this includes his signing bonus) and $6.34 million is more important than the difference between $138.34 million ($135 million + $3.34 million from FanTex) and $150 million.
I agree with him.
Next: So the FTC Says Vemma is a Scam…